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Thinking Beyond the Budget Score of the Financial CHOICE Act

The House will vote tomorrow on the Financial CHOICE Act of 2017 (CHOICE) to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act. Most significantly, the bill would repeal the authority to use the Orderly Liquidation Authority (OLA) and replace it with bankruptcy, lift Dodd-Frank's regulatory regime on certain financial institutions, and provide greater oversight of regulatory agencies.

The Congressional Budget Office (CBO) estimated in May that enacting the CHOICE Act would reduce federal deficits by $24 billion over ten years through direct spending savings of $30 billion and a reduction in revenues of nearly $6 billion. A new estimate of the manager’s amendment to the bill would see greater reductions by authorizing the Federal Deposit Insurance Corporation to charge additional fees (to offset appropriations for salaries and expenses of certain employees). As with other reports of programs on this scale, CBO's analysis understandably comes with a key caveat of uncertainty.

Due to the nature and the scope of both the financial sector and Dodd-Frank’s intricate regulatory regime, CBO was tasked with producing a complicated cost estimate based on a confluence of multiple factors, assumptions, and probabilities. For example, CBO’s analysts had to forecast the likelihood of OLA being triggered over the next several years under current law: “CBO’s baseline projections reflect the estimated probability of various scenarios regarding the frequency and magnitude of systemic problems that could trigger spending by the [OLA].”

Then CBO needed to make assumptions of whether certain financial institutions would take steps to opt out of financial rules and regulations, and figure out who would bear the costs when large systemically important firms fail in the absence of orderly liquidation authority. CBO expects that this would lead to losses to the Deposit Insurance Fund (DIF), a federal backstop of depositors in insured banks. The proposal’s effects on the DIF “would depend on many legal, financial, and economic factors that are uncertain and difficult to quantify.” The bottom line is, with a higher than usual degree of uncertainty than seen in run-of-the-mill cost estimates, taxpayers would see net budgetary savings.

There are additional points to consider regarding the CHOICE Act beyond its estimated budgetary impact:

Dodd-Frank increases moral hazards and risks to taxpayers. Financial regulators would no longer be able to deem certain financial institutions as Systemically Important Financial Institutions. This process essentially implied that the designated firms would be bailed out by taxpayers if they failed. CBO notes that creditors could face greater risk of losses under repeal. This will make potential creditors take greater precaution in weighing risks of loss versus reward. Mark Calabria of the CATO Institute notes that “a significant expansion of the banking safety net is the result of expanded explicit guarantees in the Dodd-Frank Act. For instance, Dodd-Frank expands deposit insurance to $250,000 per person per bank. Since the crisis the amount of insured deposits outstanding has risen by over $2 trillion. This is another $2 trillion which the taxpayer directly stands behind. It is also another $2 trillion that is immune from market discipline.”

Dodd-Frank is advantageous to big banks over community banks. It is expected that larger financial institutions would opt to remain under Dodd-Frank regulatory rules. Meanwhile, the community banks’ share of financial assets, which had already been decreasing for the two decades prior to Dodd-Frank, declined at a faster rate after passage of the law.

The CHOICE Act would bring greater oversight on regulators. Financial regulatory agencies, including the Consumer Financial Protection Bureau, would be subject to the regular appropriations process, providing accountability and a check on regulatory overreach.

Dodd-Frank imposed unfunded mandates on state and local governments. Because many of Dodd-Frank’s regulations were issued by independent agencies, they were excluded from the Unfunded Mandates Reform Act of 1995, which requires a report cost-benefit assessments of mandates that exceed a certain threshold cost.

Even if the House passes the CHOICE Act, price controls on debit-card swipe fees (established through the Durbin Amendment) would still be in place. This is something the Senate will need to address, or an issue that both Houses will have to tackle separately, and soon.

NTU Foundation

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Founded in 1973, National Taxpayers Union Foundation (NTUF) is a non-partisan research and educational organization dedicated to showing Americans how taxes, government spending, and regulations affect them. Through difference-making data, analysis, and commentary, we empower citizens to engage in the critical policy debates of our time – and hold elected officials accountable.